Monetary Union Viability: A Criterion Proposal. (11th July 2014)

• Record Type: Journal Article
• Authors: Alonso, Alberto; Guzmán, Vanesa
• Is Part Of: Metroeconomica. Volume 65:Number 4(2014:Nov.)
• Page Start: 717
• Page End: 750
• Publication Date: 2014-07-11
• Subjects: Economics -- Periodicals; 330
• DOI: 10.1111/meca.12059
• Languages: English
• ISSNs: 0026-1386

Abstract

<abstract abstract-type="main"> <title>Abstract</title> <p>We propose a model that represents the dynamic behaviour of a monetary union comprising two countries whose natural interest rates are initially unequal. This initial disparity and the subsequent application of a common monetary policy generate different national inflation rates and lead to losses of competitiveness, foreign deficits, and the indebtedness of one country with respect to the other. We propose as a viability criterion for the modelled monetary union a combination of non‐explosive foreign debt and the ability of the central bank to neutralize the contracting effects of taking on additional debt to avoid falling into a liquidity trap.</p> </abstract>